Nonparametric estimation in a nonlinear cointegration type model

Abstract

We derive an asymptotic theory of nonparametric estimation for a time series regression model Zt = f (Xt)+Wt, where {Xt} and {Zt} are observed nonstationary processes and {Wt} is an unobserved stationary process. In econometrics, this can be interpreted as a nonlinear cointegration type relationship, but we believe that our results are of wider interest. The class of nonstationary processes allowed for {Xt} is a subclass of the class of null recurrent Markov chains. This subclass contains random walk, unit root processes and nonlinear processes. We derive the asymptotics of a nonparametric estimate of f (x) under the assumption that {Wt} is a Markov chain satisfying some mixing conditions. The finite-sample properties of f̂(x) are studied by means of simulation experiments. © Institute of Mathematical Statistics, 2007.